As private liquor stores open, prices could go up | Business

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You might want to stock up on tequila and rum if margaritas or mojitos are on your summer menu, because prices are likely going up at many local retailers this week - and prices are just one of several big changes in store when Washington state abandons its long-held place in the liquor business.

Voters approved Initiative 1183 last fall, allowing stores larger than 10,000 square feet and some smaller stores to sell liquor. Supporters touted the initiative, backed by warehouse giant Costco Wholesale Corp., as a free-market reform for an industry monopolized by the state since the end of Prohibition.

Under the measure, restaurants and bars were allowed to begin buying liquor directly from distributors March 1, and they can begin buying directly from retail stores June 1.

However, the initiative also imposed an additional 10 percent distributor fee and a 17 percent retail fee on spirits to reimburse the state for millions of dollars in lost revenue.

Big-box stores like Costco can negotiate volume discounts for some products or sell their own labels. But distributors have exclusive rights to distribute some spirits, and volume discounts for those products may not be as widely available.

Some say that likely means higher prices for consumers, regardless of where they buy their spirits.

"Sky high. They're going up very, very high," said Melody Kennett, manager of a contract store that closed over the weekend in Naches, about 10 miles west of Yakima. "Sure, big-box stores will be able to negotiate some discounts by ordering in bulk, but the initiative included higher fees to the state for everybody. Prices will go up for everybody."

Pricing is still in flux for most distributors, wholesalers and retailers, because it's the first time in 70 years the private parties have been in the liquor business, said Joel Benoliel, Costco senior vice president and chief legal officer.

"Costco is determined we will be competitive, maybe a little lower, than the state was," he said. "We want to buy cheaply, distribute more cheaply, and take a little shorter margin. That's what we do on all our prices."

But he also noted that nobody should be expecting California prices, because Washington has much higher taxes and fees.

Most distributors and retailers have been wary of sharing their new prices in advance of the switch Friday, but price lists provided by two distributors to an independent grocery store offer a glimpse into what consumers can expect at many stores.

The state's current charge for a 750-ml bottle of Absolut Citron Vodka: $22.95. That price includes all fees and taxes.

The distributor's price per bottle for a case of the same product: $18.27. Then add in an industry-average 20 percent markup for the retailer to cover costs and make a profit - this will vary by store - and a 17 percent fee required under the initiative to recoup lost revenue to the state, a 20.5 percent retail sales tax and a $2.83 liter tax. Price per bottle: $33.74.

For 151-proof Bacardi Rum, also in a 750-ml bottle, the price increases from $26.95 per bottle to $34.73.

The initiative also requires distributors to raise at least $150 million in licensing fees for the state, or Washington officials can retroactively charge them for it.

That provision puts wholesalers in an uncomfortable position, having to pad their prices enough to cover that surcharge, said Jan Gee, president of the Washington Food Industry Association, a trade association for small, independent and family-owned grocery stores. But the wholesale taxes and fees fall after the first year.

"None of the retail and consumer prices ever reduce," she said. "They stand the way they are right now, and they're huge."

Some stores are reportedly drafting signs for their liquor shelves to explain the higher prices. And at least 20 contract liquor stores have notified the state that they will be closing altogether - either because larger stores located in the same location enforced "no compete" clauses in their lease or because they elected not to try to compete with big-box stores.

Benoliel of Costco said he understand some retailers may not have the same conclusion that prices will go down, but over time, he said consumers will benefit from the changes.

"We believe, in a competitive marketplace, the consumer wins," he said.

After 37 years in business, Kennett sold the rights to her contract store to someone else in Naches when the grocery store that owns her building - and obtained a retail liquor license after the initiative passed - enforced a no-compete clause. A steady stream of customers emptied her shelves in the final days leading up to the store's closure on Saturday.

Meanwhile, the Washington Supreme Court has yet to rule over the constitutionality of the measure, after opponents filed suit to overturn it. At issue is whether the initiative violates state rules requiring measures to address only one subject, because it includes a provision to set aside $10 million for public safety.